Things to think about #8 - Mr. Trump, US imports from China and Cultural Wars
At this point, you will have read numerous takes, predictions and analyses of what four more years of Mr. Trump in the White House means. I promise that I will make this short. I think Sam Harris’ “The Reckoning” offers a good explanation of what went wrong for the Democrats and the liberals. I also enjoyed the discussion between Glenn Loury and Daniel Bessner, even if I strongly disagree with Mr. Bessner on a number of key areas. If you want a longer explanation of the ills that have befallen US Democrats, unrelated to the diagnosis of excessive wokeness and identity politics, you should read Thomas Franks’ “Listen, Liberal”, published on the eve of the Democrat’s first loss to Mr. Trump in 2016. It’s all there, with a straight line back to Frank’s earlier identification of the problem when he asked “What’s the Matter with Kansas?” Apart from that, we should also add that Mr. Trump simply ran a superior campaign to Kamala Harris. After all, you don’t win all the swing states through luck or due to bad opposition alone.
Then we get to the predictions of what a Trump presidency, with control of both houses, will do, and how quickly it will do it. My initial impression is that many forecasters have jumped the gun, especially on the effects in Europe, but perhaps the lesson here is that uncertainty over what exactly Mr. Trump intends to do drives volatility not just in markets but also in the predictions about markets and the economy more generally. After all, we’re now entering an era where a tweet from the president can send markets and forecasters down a rabbit hole only for the same president to later forget what he said or change his mind with a moment’s notice. Buckle up!
The key to navigate the significance and ramifications of the early moves of a Trump presidency is to understand the fundamental flaw in Mr. Trump’s thinking about world affairs, or perhaps more charitably, the fine print which Mr. Trump, and those buying into his promise to deliver quick change, fail to disclose. Mr. Trump mistakes agency and bargaining power—both of which he and the US wield in spades—with the absence of economic and political trade-offs. Such trade-offs will become quickly apparent once the president-elect is in the saddle. How, for example, does the president intend to beat down inflation in the domestic economy by administering a negative supply shock—tariffs and the deportation of 13 million of low-income workers—while also cutting taxes? Are we really supposed to believe that the bonfire of public regulation and excess promises by the “DOGE” led by Elon Musk and Vivek Ramaswamy will slim down the US state apparatus to the extent promised? And can the resources freed up by such draining-of-the-swap be freely moved into manufacturing to underpin the fiery industrial boom that Mr. Trump wants to create as the US rids itself from the dependence of foreign goods? The answer from the point of view of economics is “no”, but then again, economists can be wrong too.
On foreign policy, the contradictions are larger still. How does Mr. Trump intend to reconcile the threat of “pulling out” of NATO—unless Europe ramps up defence spending—and the pledge to end wars here, there and everywhere with the threat of US military might striking down anyone who don’t play ball. This hodgepodge of isolationism with a “peace through strength” foreign policy is riddled with contradictions that will quickly emerge as Mr. Trump makes his way across the world. The big question is whether the Trump administration is willing to wield hard power, the rejection and opposition of which it claims to have harnessed in rising to power, when the chips are down. Or perhaps more practically; under what conditions will Mr. Trump resort to the stick in relations with Russia, China and other belligerents?
In Europe more specifically, the truth is that the US doesn’t want the region to achieve an independently strong defence position allowing European countries to make autonomous defence and foreign policy decisions. But the US would very much like Europe to send a big(ger) cheque to the Pentagon every year, thank you very much. As for NATO itself, it is astonishing to watch a US political establishment explicitly undermine a post WWII institution which was set up by the US and, which has arguably been the single-most effective multilateral extended arm of American foreign policy in a post-Cold War setting. NATO is nothing without the US, which is a hint to how important it is for the US itself, one would think.
The point about volatility and uncertainty in an era of Mr. Trump can then be understood not so much as a verdict on whether the new president will be able to do what he says that he will do. Rather it should be seen as a reflection of the failure of the incoming US executive arm to understand or recognise—or at least to underestimate—the trade-offs underlying the can-do attitude to act quickly on a number of important policy areas.
Tariff this!
Earlier this year, the St. Louis Fed published an interesting study on the penetration of Chinese goods in the US import basket. More specifically, the article presents three separate perspectives on this topic. It shows that China is the US import partner which is the biggest source of “cheapest product”, by far. Specifically, for just under 30% of goods imported by the US—disaggregated at the 10-digit Harmonized System (HS) level—China is the cheapest supplier. The article then shows the products where China is the dominant source of cheapest supply. These include, but are not confined, to footwear and headgear, metals, data processing machinery, textiles, manufactured articles, semiconductor devices as well as electric motors and resistors. Finally, the article shows that for about 45% of the product categories in which the US imports from China, the Chinese supplier is the cheapest compared to the cheapest non-China substitute.
The article concludes that:
This analysis documents China’s significant presence in lower-unit-value segments of U.S. import markets, particularly in advanced electronics. As the U.S. seeks to diversify its imports, it may shift the price-quality mix of products sourced across various supply chains. The trade-off between cost differentials and strategic supply diversification will critically determine domestic economic outcomes and global trade dynamics over coming years.
The trade-offs noted above are clearly visible here. We don’t know the scope and size of any tariffs on Chinese imports, but assuming Mr. Trump hits China the hardest, the numbers above point to a risk of significant price increases for some goods given China’s role as cheapest supplier in many product categories. The idea, of course, is that the US should be able produce much of these goods itself, but unless you assume a very flexible domestic supply side, significant import tariffs on Chinese goods will either raise prices significantly for the goods listed above or, in the case of very large tariffs, simply prevent the US from consuming them. Even in the case where we assumed that the US has the actual productive capacity to replace Chinese supply, such productive capacity would have to be transferred from other areas of the economy, raising prices in those sectors. An interesting corollary in this situation is that some imports from China likely will be replaced by imports from other countries. Put differently, in a world where the US consumes the same basket of goods—remember that no one in Team Trump is talking about the US consumer losing out in terms of the volume of consumption—and tariffs on Chinese imports are relatively higher than on imports from other countries, the US will simply import the same basket of goods, but at a higher price from non-Chinese suppliers. Add to this picture the White House’s intention to expedite the removal of illegal immigrants—which are currently propping low-income labour supply—it is very difficult to see how Mr. Trump’s economic policy won’t be inflationary.
Nihilism and cultural wars
The latest edition of the Hedgehog Review was released just before the US presidential elections, and its headline essay by James Davison Hunter, LaBrosse-Levinson Distinguished Professor of Religion, Culture and Social Theory at the University of Virginia, offers an insightful and illuminating perspective on the polarisation which cut through the US population on the eve of the vote, and which is likely to linger even as Mr. Trump presents his White House. His conclusion that the point of debate isn’t to reach agreement as much as it is to vanquish your opponent rings true to me;
(…) what emerges is a picture of a politics that is fundamentally dehumanizing, in which the negation or annihilation of the ideological “other”—the coastal elites, the prairie pro-lifers, the “woke,” the rust-belt racists—is not incidental to the ongoing culture war. Annihilation—cancellation or erasure—is the point.
A subscription to the Hedgehog Review is money well spent!